Philadelphia Federal Reserve Bank President Anna Paulson said she favors keeping interest rates stable and linking lower borrowing costs to sustained inflation control.
Paulson said at a meeting organized by the Atlanta Fed on Tuesday: “A slightly tighter policy helps control inflationary pressures while maintaining labor market stability. Keeping interest rates steady allows us to assess economic trends and risks to price stability and the labor market.”
She said the unemployment rate has remained “very stable,” indicating that the labor market is “roughly in balance,” while inflation was already too high even before energy prices surged due to the Iran war.
She added, “Assuming the labor market remains balanced, rate cuts would only be appropriate if inflation continues to decline.”
Last month, the Federal Reserve kept interest rates unchanged, with some officials noting greater uncertainty about the economic impact of a war in Iran. However, three policymakers dissented, supporting the decision to hold rates steady but opposing language in the post-meeting statement that suggested the next rate move might be a cut.
Paulson said Tuesday: “I think it’s healthy that market participants have already factored in the possibility of the federal funds rate remaining unchanged for an extended period, as well as the need for further policy tightening.”
During the Q&A session following her speech, Paulson stated that she believes recent fluctuations in long-term bond yields have been largely driven by expectations of rising “real interest rates,” rather than by higher inflation expectations.
She stated in her prepared remarks that the labor market is expected to remain stable and that price pressures would “gradually ease” back to 2%. However, she added that risks to the inflation target have “increased.”
She emphasized that the future path largely depends on how long the war will disrupt supplies of oil and other goods.
She said, “If the Middle East conflict can be resolved quickly and shipping and oil production return to normal rapidly, inflation and inflation risks may ease relatively soon. However, if the conflict takes longer to resolve, inflation and inflation risks, as well as risks facing the labor market, could remain elevated for an extended period.”
The Philadelphia Fed president, who has voting power on policy this year, also noted that households are facing numerous challenges in coping with high energy prices, such as frequently switching from premium brands to lower-cost alternatives and some families increasingly relying on credit cards to maintain their spending levels. She said that despite these pressures, overall consumer spending has remained resilient.
“Although many households are feeling the economic pressure of inflation, there is little indication that consumers as a whole are significantly cutting back on spending,” she said.
